It is very important to know the difference between nominal interest rate and effective interest rate . Nominal interest rate does not take into account the compounding period while the effective interest rate does take the compounding period into account and thus is more accurate measure of interest charges in dealing with financial instrument. By using example nominal interest rate also know as simple interest rate. Nominal interest rate is calculated on the original principal only. If you borrow $ 100 000 for one year at 6% you end up paying back $106000 effective interest rate also know as compound interest . With effective interest rate is applied to the original principal and all the accumulated interest.
Difference between nominal interest rate and effective interest rate.
by mutuyimana donatha -
Number of replies: 0